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The Salt Lake City office of CBRE has released its Q1 2017 MarketView reports, highlighting conditions of the local office, retail and industrial markets. Click here to download full copies of each report.

DEVELOPMENT DRAWS MIGRATION WITHIN OFFICE SEGMENT

A notable occurrence during the first quarter of 2017 was a “flight to quality,” as office tenants seeking employee retention, expansion or space efficiency migrated to Class A buildings. This flight to quality was especially visible in the suburbs, where Class A’s net absorption of 210,697 square feet was accompanied by a negative 117,846-square-foot net absorption in Class B product, reflecting a move from one space segment to the other.

“Though the newly constructed 111 Main tower continues to dominate downtown office activity, several re-purposed buildings have recently become available in the downtown area,” noted Eric Smith, senior vice president. “These sites have increased the available inventory of office buildings and have provided new creative and unique opportunities in an otherwise tight market for creative office spaces, aiding the current flight to quality.”

The suburbs continue to lead-out in construction activity, with over 1.4 million square feet of office space currently underway in the suburban market. The office market also experienced marketwide net absorption of 243,944 square feet, though vacancy still ticked up to 11.6 percent due to partially vacant new construction and an increase in sublease space. Professionals are keeping a close eye on the level of development, but local economic drivers of office demand are strong in Salt Lake City and the office market is expected to continue to perform at healthy levels throughout 2017.

RETAIL IN STATE OF TRANSITION WHERE WINNERS AND LOSERS EMERGE

As is the case across the nation, retail in the Salt Lake market is in a state of transition. While demand drivers are strong, retail development proceeded at a more cautious pace during Q1, 2017; in total, only 136,421 square feet of non-mall retail was actively under construction—54 percent less than the year prior. However, expansion is still occurring—particularly in areas experiencing favorable demographic growth. The majority of retail expansion underway in Salt Lake is near residential and workplace growth hubs, such as the Central East and Southwest submarkets.

“A number of big-box retailers have vacated space in recent months, bumping the vacancy rate up 90 percentage points to 6 percent—the highest we’ve seen since 2013,” noted Russ Harris, first vice president. “This vacancy increase has long been expected, so it does not come as a shock to the market. While some chains have struggled to adapt to changes within the industry, others are expanding—particularly discount, convenience and service-oriented retailers. As a whole, the retail segment continues to perform well—it’s just evolving.”

INDUSTRIAL DEMAND & DEVELOPMENT CONTINUE TO DRIVE EXPANSION

During the first quarter of 2017, industrial development continued to hold strong, with 3.4 million square feet under construction at quarter-end. The majority of construction underway is concentrated in the California Avenue submarket, representing 73 percent of current activity. In fact, the Northwest Quadrant of Salt Lake City, which includes the California Avenue, Airport and West Valley submarkets, has been the hub of the majority of Salt Lake’s industrial activity for several years. Projects include significant spec developments, as well as high-profile build-to-suit and owner-user buildings.

“The Northwest Quadrant is well-positioned to benefit industrial users, as it offers access to an international airport, rail lines and two interstates,” commented Tom Dischmann, senior vice president. “Over 67 percent of all leasing activity during Q1 2017 took place within this area; 92 percent of current construction projects are in this sector as well. Its strategic location, coupled with the amount of developable land in the area, continue to appeal to industrial users of all sizes.”

The industrial market continues to experience sustained levels of demand, which is fueling continued market expansion. Q1 2017 experienced over 1 million square feet in broad-based leasing activity; this reflects a healthy market where all types and sizes of industrial users are active. Looking forward, the pipeline of large and potentially market-moving users looking for space in Salt Lake is far from exhausted, setting up 2017 to be another strong year for industrial leasing.